Leveraged buy outs attractive despite the hurdles.

The private equity industry is expected to grow rapidly in India in spite of constraints that limit firms largely to taking minority stakes in companies rather than buying them out, according to a survey by Deloitte, the professional services group. Read original article

Almost half of respondents said legislative change was the most important step needed by the industry, which is constrained by regulations such as a ban on leveraged buy-outs.

“India remains largely a development capital business,” said Sandeep Gill, managing director of Deloitte’s new Indian mergers and acquisitions arm, Deloitte Corporate Finance Services India. “Buy-outs will probably happen in the longer term, but not yet.”

India was the biggest recipient of private equity investment in Asia last year, with 143 deals worth a total of $2.21bn, according to figures from Thomson Financial, the data group.

This amount was the biggest sum of private equity investment in one year to date for any Asian country as India’s 9 per cent economic growth attracted big buy-out firms, from the Carlyle Group to Blackstone and General Atlantic.

India was also one of the most active countries in terms of fundraising, with seven funds gathering a total of $1.8bn in the country.

The move by Deloitte to launch its Indian corporate finance business comes as other professional services firms ramp up their M&A teams to cope with a surge in transactions by Indian companies.

The firm’s corporate finance department will be headed by Mr Gill and Bimal Modi, who were with Deloitte in London. It is starting with 16 people, although this could rise to 50 by the end of the year.

The firm specialises in private equity transactions, according to Alan S. Alpert, managing partner for M&A transaction services at Deloitte Tax.

The prevalence of family-controlled businesses in India is another constraint on private equity, the survey found. The founding entrepreneur or their children may wish to bring in private equity money and expertise to help the business expand but have little appetite for handing over the reins.

“In most of the emerging markets, this is an issue,” Mr Alpert said. “The entrepreneur doesn’t want to sell and he wants to stay in control.”

The ban on leveraged buy-outs is a constraint, given that this is the preferred mode of entry for many private equity firms.

Other regulatory obstacles include foreign ownership and investment restrictions, for instance in the aviation and publishing industries, that make departing from this sort of business more difficult.

The recent influx of investors into the market would begin to reduce returns, respondents said.

“The investments made two to three years ago were made at higher multiples than those made three to four years ago, so it follows that returns from these deals will be lower,” the survey said.